強鹿 (DE) 2002 Q4 法說會逐字稿

Good morning and thank you all for holding and welcome to the Deere and Company fourth quarter fiscal year conference call.

At this time your lines have been placed on a listen-only mode until the question and answer session of the conference.

Today's call is being recorded on behalf of Deere and Company.

If you should have any objections, please disconnect at this time.

I would like to now turn the conference over to Marie Ziegler, vice president of investor relations.

Good morning.

Greg Derrick, Tony Hugley, and Susan Carlix joined me on the call today.

For those of you that haven't yet heard, Tony has accepted a position as a county manager at one of our ag factories and will be leaving the department shortly.

Susan has actually been in investor relations once before.

She was most recently manager of banking relations, and she will be replace Tony.

This call is being broadcast live on the internet and recorded for future transmission and use by Deere, CCBN and third parties.

Participants in the call, including the Q&A session, agree that their likeness and remarks in all mediums may be stored and used as part of the earnings call.

Comments made during this conference call that state management expects, our outlook, we project or otherwise state the company's predictions for the future are forward-looking statements such to important risks and uncertainties.

Actual results might differ materially from those projected in the forward-looking statements.

Additional information concerning factors that could cause actual results to differ materially is contained in the company's SEC filings, including the most recent Form 10-Q and in the press releasing filed today on Form 8-K.

Despite markets that remain lackluster, we had another quarter of significant profit improvement.

This is our third quarter in a row.

Where you see evidence of the initial success of our drive to improve the returns that we generate throughout a business cycle.

Really, you see it for the full year.

It's in our income statement.

On a modest gain in revenues, we doubled income, and this is excluding restructuring of last year, which as you know was significant.

You see the evidence in our balance sheet with lower field and company-owned inventories, and you see it in our cash flow statement.

We've improved cash flow generation for the year and generated for the enterprise $1.9 billion in cash flow.

Now let's look at each of the individual divisions and we'll start with worldwide ag.

In the quarter, worldwide ag sales were up 12%, or $192 million.

We are continuing to see increases in Europe as we benefit there from a new product introductions of a year ago, but also in this quarter we saw higher sales in the United States and Canada, reversing a trend of the previous nine months.

We had improved price realization in both North America and overseas markets, and this accounted for about 3 points of the 12-point gain in net sales.

Pricing and volume are the two major contributors to improved operating profit this quarter, but we also saw lower SA&G and lower R&D.

Partially offsetting these would be $26 million of cash paid to credit on the dealer receivables and higher pension and overhead expense as we've talked about all year.

Looking now at October retail, last week the Association of Equipment Manufacturers reported for the United States and Canada industry sales of utility tractors, which would be tractors 40 to 100 horsepower, industry sales were up 7%.

Deere sales were up double digits.

On to row-crop tractors, two-wheel drive tractors over 100 horsepower, industry sales were down 9% and Deere was flat, but let me clarify we were flat against the highest volumes we have seen in a month of October since 1984.

Perhaps what's most significant, though, is the difference between our results in the two Octobers.

Last year our sales were supported by a clearing out of old models, specifically the 8010 series tractors, and we had relatively high incentives on them.

You may recall we had 0%, 60 month financing available.

In contrast, this year's October had sales of the new model 8020 series and much lower incentives.

On four-wheel drive tractors, industry sales were up 7%, and we were down a single digit.

And finally for combines, the industry was down 8%.

Deere sales were up a single digit.

Inventories in all four of the key categories -- this would be utilities, row crop and four-wheel drive tractors and combines -- are below industry levels.

At Deere we ended October with row crop tractor inventories at 26% of trailing 12 month sales and combines at 8%.

That is 8%.

You can see our inventories continue to be in very good shape.

Our retail activity in Western Europe in the month of October for tractors was up single digits and for combines down double digits.

Let's turn now to the outlook for 2003 and here are some of the factors that we considered as we formulated our outlook.

In Australia, we know that El Nino has impacted the weather there.

It's dry and hot.

We expect wheat production to be less than half that a year ago.

In South America, we continue to pay careful attention to the events in Brazil, but the farm segment is very healthy and stands to remain so with farmers producing U.S. dollar based hard currency crops.

In Europe we expect to continue benefiting from the significant new product introductions of 2001 and from our dealers increased capacity.

We talked about the fact that our dealers have added more salespeople and technicians to support a higher volume of business, and this is significant because Europe is one of the areas of the world where we have meaningful growth opportunities in our ag business.

As you look at the United States and Canada, it's pretty clear that drought impacted retail activity this fall.

In our fourth quarter, industry retail sales for row crops were down 13% and for combines down 23%.

Instead of disaster payments, this year farmers will be getting money from the market, but it looks to us like some are waiting past the harvest season when spot prices are typically depressed.

We see estimated farm cash flow down by about $12 billion in 2002 compared to 2001, and we think this delay in -- between getting money from the Government and selling crops in the marketplace, in conjunction with very dry conditions, has really caused farmers to hold off a bit on their equipment purchases.

We do anticipate some calendar year-end tax driven bind because of the accelerated under the Job Creation and Worker Assistant Act.

While some were impacted, other farmers had very good crop yields and are able to take advantage of overall good crop prices this year.

We expect there will be some year-end tax driven buying.

However, our forecast overall from now until the spring really contemplates a fairly quiet period.

We think it will really take spring planting to act as a catalyst to get sales moving in the United States and Canada.

Now, our reason for encouragement as we move out into 2003 has to do with the fact that the reduced yields in the U.S. and Canada in both corn and wheat, set the stage for much lower ending global stock-to-use ratios than we've seen for some time.

The result has been higher estimated commodity prices for this crop year versus a year ago, and just looking at the mid-point of what the USDA is estimating, corn would be at 240.

That's a 22% increase over the rates of last year.

For beans, $5.40.

That's a 24% increase.

In wheat, $3.80 for a 37% increase.

So again, you have good cash receipt potential in 2003.

And additionally, we still viewed the new U.S. farm bill as providing a farm income safety net that will give farmers confidence as they move through the six-year bill.

All combined, we believe the worldwide sales of our ag division will be up 8% in 2003.

Turning now to our commercial and consumer equipment division, fourth quarter sales were up $94 million for a 20% increase.

Acquisitions, which would be John Deere Landscapes that was acquired last year and the divesture of Homelite really are a wash.

So the $94 million increase really is "Real" from continuing operations.

Of the 20-point increase in that sales, over two points comes from improved price realization in the quarter, and a year ago, this really reflects the fact that we were clearing out old models in anticipation of the very major product launches that would occur in 2002.

Although our sales are up, I still want to point out that the fourth quarter is a seasonally weak quarter and this again reflects the fact that we're shifting production into the second and third quarters to more closely reflect seasonal demand.

There are two other factors to talk about in this quarter's results.

I mentioned the absence of Homelite in the sales.

Homelite in the fourth quarter of last year had an operating loss before restructuring charges of about $40 million and so clearly it benefits the commercial consumer division not to have that dragging their performance.

And then secondly, compensation paid to credit was $11 million in the quarter.

Retail activity in the month of October for our CNCE division was up strong double digits.

In fact, you could really say the last six months of the year were more positive than we had initially expected.

As we look at the total sales for the year, they were just down slightly.

This would be our sales through our dealer channel.

As we went into the year, we were concerned, of course, about the economic situation and then as the year progressed, the impact of the drought on [Moline] markets, but I would have to say that here's evidence that we clearly benefited from the new product introductions.

And our division outlook really reflects the expectation that we'll be able to build on some of the momentum of those new products.

Last year we did not have a full year of availability on some of the models, and so we'll benefit from that in 2003.

Our economic outlook has the economy not moving into recession.

We will clearly benefit from the new relationship with Home Depot, and for the first time since 2000, we will be producing basically to retail.

For the last two years we've underproduced retail.

This year, 2003, gets about $100 million benefit just from being able to produce to retail.

In summary then, projected division sales grow about 15% versus 2002 levels.

Moving on now to construction and forestry.

Here, reported sales of $598 million in the quarter do include about $50 million of incremental sales from the consolidation of Deere and Hitachi marketing operations.

The big news in the quarter, though, is the fact that construction in forestry reported at operating profit, despite very poor market conditions and despite the fact that this is a seasonally weak period for them.

It's a reflection of what I can only describe as rigorous cost and expense control.

Also of note this quarter, while discounts are higher year over year, net of price increases, we actually had slightly positive net price realization in the quarter.

It's less than a point, but this is the first positive news on price realization in this division in some time.

We've spoken for the last few calls about cost related to the Nortracks investment.

We had an estimate that quarterly run rate would be between $10 and $15 million.

I just want to confirm for you the cost came in about $10 million in the fourth quarter, and that is the run rate.

We expect going into 2003ment and that is a pretext number.

And just finally, for completeness, compensation paid to credit was $5 million.

For the year, construction and forestry reported an operating loss of $75 million.

But there are a couple of unusual factors that, while certainly very real and affect the operating performance, if you take them out, I think, show again the power of some of the cost control measures and business improvement initiatives in the construction and forestry division.

First, note that Nortracks was a cost on an operating profit basis of about $60 million this year for the full year. [Skid steers], which previously have been in the commercial and consumer equipment division this year are in construction and forestry.

Their operating loss, plus the cost of closing the factory in Knoxville this year cost the division about $60 million.

And then finally you had a new item, this compensation paid to credit, which totaled about $18 million for the year.

Without these three items, construction and forestry would show over a $60 million operating profit in 2002 in a very weak market and a very competitive market, and again, I mention this because I think it helps explain the strength of their cost control and business improvement initiatives.

And clearly when the business recovers, it shows you the operating upside potential.

Moving on to retail activity now, in the month of October, our construction retail activity in the United States and Canada on a first in the dirt basis was up slightly and on a settlements basis, flat.

In the outlook, our estimate of 2003 sales for Deere have our sales up 2%, but this does include an incremental $90 million from the consolidation of Deere and Hitachi marketing operations.

In 2002 we only had about six months of consolidated operations.

This year, 2003, will be a full year, and that's where you get the $90 million incremental.

Without this $90 million increment, sales would be down about 2%.

Turning now to credit, and this is done on net income, in the fourth quarter was $63 million compared to $44 million.

Financing of Deere wholesale is 18 in the quarter -- $18 million after tax and basically that accounts -- that's the single most item in explaining the quarter-over-quarter difference.

Just for those of you who are doing your models, for the full year, Deere wholesale added $69 million to credit's net income.

Past dues in the core portfolio continue to be very good, and in fact, they are actually below the low levels of a year ago.

Forecast for 2003 has net income estimated at around $300 million compared to 2002's $243 million.

The primary drivers of the improved profit are, first, the absence of significant credit losses that occurred in 2002.

First in the second quarter we took a $28 million after-tax loan provision for allied deals and in the third quarter our provision for bad debts was $12 million higher due to the bankruptcy of a large John Deere dealer in Canada.

So that's the first factor.

The second factor would be absence of currency-related losses due to Argentina's devaluation in 2002 and that was about a $22 million after-tax impact in 2002.

A third factor will be a benefit from European wholesale receivables.

All year long we have talked about the fact that we've sold U.S. dealer receivables from the parent to the credit company.

We are doing the same thing in Europe.

We have had a modest sale at the end of this year, and for the full year we'll probably be in the range of $500 million or so in sales from our European operations -- excuse me, of receivables that will be sold from the European operations into the credit operations.

This adds about $15 million of after-tax income to credit.

And then I would note a partial offset.

We anticipate a lower level of receivable sales in 2003, specifically in the first and second quarters, and if you'll recall, we benefited in those quarters from unusually large sales and the resulting gain then on the sales.

Moving on now to the housekeeping items in equipment operations.

First, there was positive price realization from the company in the fourth quarter.

Obviously we had strong improvement in ag and commercial and consumer.

That contributed about 3 points of the quarter's net sale increase.

As discussed all year, we had higher pension and post-employment benefits expense in the fourth quarter on a pretax basis.

This is $28 million, and it primarily affects our ag operations.

For the year the total was 107 million.

This is increment in the past year.

And the primary drivers were the factors we've been citing all year, higher medical inflation, lower discount rate, and the stock market.

I've talked a couple of times now about expense control, and it's really evident if you take a look at SA&G and R&D.

SA&G is down significantly in the quarter.

Now, a year ago we had about $86 million of restructuring included in SA&G.

So if you take that out, still on an adjusted basis, we're down about 9% in the quarter and about 4% for the year.

R&D is down about 11% in the quarter, as well as for the full year and here we're benefiting clearly from the absence of the huge number of new products that were launched last year but also in this line item, again you continue to see better expense control.

The equipment operations tax rate is unusually high this quarter, but remember the quarterly rate is really driven by the fact that for the full year, you need to make adjustments to get to the proper rate, which turned out to be somewhat high at 57%.

This rate is the result of a relatively low level of pretax income in the equipment operations and then the impact of permanent differences like goodwill and other nondeductible costs and writedowns.

I'd like to just cite one thing on the balance sheet.

We have talked extensively about asset management as being one of the key focuses of the company.

We had a goal to reduce our inventory and receivables by $350 to $400 million this year, and this would be on top of a $400 million reduction last year.

If we look at these items at constant exchange rates, we achieved it.

We had a $324 million decline as reported, but if you consider a $54 million exchange impact at constant exchange rates, we actually had a decline of $375 million.

Ag, as reported, would be about $120 million of the decline.

Considering currency it would be about a $155 million decrease.

Commercial and consumer, $205 million as reported at constant exchange rates, about a $215 million decrease.

Now, moving on to the forecast.

For the full year, you saw in the press release that we expect our equipment sales will be up 8 to 10%.

If you consider normal volume as being defined as 100%, then this estimate puts our sales during 2003 in the range of mid-90s, and this would compare to about 87% of normal volumes in 2002.

The net income projections of $500 to $600 million include higher post-employment benefits expense and pension expense.

Incrementally we expect these will cost between $250 and $300 million pretax in 2003 and about two thirds of this increase is due to [OPEB] and one third to pensions.

Now, the increases are primarily due to changes in assumptions that reflect current market conditions.

And [OPEB] clearly affected by what's happening in medical cost trends.

I think you can hardly pick up a magazine or a periodical without reading some article about what's happening to the rate of medical inflation.

In pensions, we've cut our long-term expected rate of return, even though we have outperformed our previous assumptions over the past 25 years.

We are lowering our rate from 9.7% to 8.5%.

And for both [OPEB] and pension, we are also cutting our discount rate a full 50 basis points, going from 7.25% to 6.75%.

And this implies, therefore, taking together an incremental expense in the range of around $70 million pretax per quarter in 2003.

That's the income statement impact.

Now, what's the cash flow impact?

Well, on the pension side, in the U.S. plans, we have been on a contribution holiday for five years based on past performance.

And we have no minimum required funding in the U.S. plans in either our fiscal year 2003 or 2004.

We may choose to make a contribution but we do not have to make a contribution.

On [OPEB], basically that is done on a pay-as-you-go basis.

The increment in terms of funding in 2003 would be about $25 million compared to 2002, and that would be about the same rate of increase that we had in 2002 versus 2001.

Now, again to emphasize, despite the increase in incremental [OPEB] and pension costs, we have enterprise net income -- that includes credit -- estimated in a range of $500 to $600 million.

Clearly we are going to benefit from increased volume but also from the expense control initiatives that we have been working on over the past year and a half.

Also impacting our numbers, starting in 2003, we will no longer amortize goodwill, and this provides a benefit of about $50 million after tax.

We'll benefit from the absence of restructuring actions like closing the utility vehicle factory and the skid steer factories.

The cost of these initiatives was about $50 million after tax this year.

Plus, we get the full year benefit of the early retirement program for salaried employees that we had in the last part of calendar 2001.

If you'll recall, we had estimated about a $90 million after-tax benefit.

We estimate we got about two thirds of that in 2002.

We'll get the remaining third or $30 million after tax in 2003.

The equipment operations tax rate will actually be slightly lower than normal.

Normal would be 37%, but in the future we're estimating between 33 and 34%, which will reflect the non-admortization or of goodwill.

So again going forward will become a 33 to 34%.

Income for the enterprise also benefits from the higher net income from credit, as I previously discussed.

And then finally, we expect to continue benefiting from cost reductions.

In 2002 we identified 3.7% in product cost savings.

This is huge.

We got some benefit in 2002, and we'll get the majority of the benefit in 2003.

And I want to tell you, our supply management personnel are working aggressively to identify further cost savings opportunities.

So taken together, our plan for 2003 calls for continued focus on business improvement initiatives and somewhat improved market conditions.

We are on track to deliver better performance throughout a business cycle and stronger investor returns that are sustainable.

And now we're ready for Q&A.

The operator will give us instruction on the polling procedure and as always, I ask to give everyone an equal opportunity to participate in the Q&A.

Limit yourself to one question with a related follow-up and if time permits, you are certainly welcome to get back into the queue.

With that we're ready for instructions.

Thank you.

At this time if you would like to ask a question, please press star, followed by 1 on your touch tone phone.

You will be announced by name prior to asking your question.

To withdraw your question, you may press star 2.

Once again to ask a question, please press star followed by 1 on your touch tone phone.

Your question comes from Gary McGuinness, and please state your company name.

Hi, Marie.

Hi, Gary.

I'm looking at your revenue forecast by segment and you've indicated you are going to underproduce to a lesser degree in fiscal 2003 versus this year.

Can you give industry sales forecast in fiscal 2003 in your major segment so I know how much -- you know, what kind of market conditions you expect, how much market share gains and how much is the effect of underproducing less?

Well, basically there would be -- you should not plan on any underproduction.

There may be some spot -- you know, some particular product lines here or there that we need to make some adjustments on balance.

I don't think that will have a material impact at all.

So that answers the first part of your question.

You were underproducing less this year.

So you get a benefit in the revenues next year by not underproducing.

Absolutely.

And that's reflected in our -- in our projections.

Okay.

Secondly.

If we look at our industry outlooks for North American Ag, I guess I should say United States and Canadian ag, we're looking at up about 58% for the industry.

Okay.

In Europe, we see the market on tractors down about 3%.

Okay.

In South America, and clearly we are cautious here, although we believe the Brazilian market will hold, we still think the industry is probably likely to be down 5 to 10% And then in and -- construction and forestry welds flat down to 35% in the industry.

And the commercial consumer

You know, we have discontinued industry outlooks in the commercial and consumer because we don't have anything to go by.

I can tell you that our base case has the economy growing but there isn't an industry reporting.

So we have not had an outlook actually for some time officially for the industry.

We have the economy growing at about 3% next year for G.D.P.

If that helps you.

But presumably if you were able to get the industry, the numbers, wouldn't be up that 15%.

I'm wondering how much is market share gains embedded?

Well, we said underproducing adds about $100 million right there.

And just as a follow-up, just on some of the cash flow numbers in terms of, what do you expect capex to be and working capital and DNA.

well, again working capital we're expecting to produce retail.

So that would be not a -- it would be a neutral.

On depreciation, there would be around a $350 million range, no amortization of goodwill next year.

We talked about that as being about a $50 million after-tax benefit to income.

And then capital expenditures, I would estimate in a range of about $400 million.

Okay.

Great.

Thank you.

Thank you, Gary.

Thank you.

Your next question comes from Steve Volkman and please state your company name.

It's Morgan Stanley.

Hey, Steve.

Just to be clear, the working capital neutral, we have sales going up next year.

Does that mean you can support higher sales volumes without adding any working capital, or we should look for kind of a normal working capital build?

No, it is our plan to not build receivables or inventories on that 8 to 10% increase in sales.

Okay.

Great.

And then just, do you mind taking us through the details row crops, four-wheel drives, combines, et cetera in terms of the outlook?

If I missed it, I'm sorry.

No, you didn't miss it.

I have -- I just really have an industry dollar weighted number right now, and that would be up 5%.

Okay.

Thanks.

For North America.

Thank you.

Your next question comes from John McGinty and please state your company name.

Credit Suisse First Boston.

Good morning, Marie.

Morning, John.

Marie, when Bob was in New York, he made the statement several times that in the past, when you have seen substantial increases in commodity prices, you have seen farm equipment sales up in the 10 to 20% area.

Now we've backed off the amount of commodity price gain a bit, but would you -- how would you characterize your forecast of 5%?

Would it be -- have you recalibrated the rate, are you being conservative or can you talk to that a bit?

Well, I think our estimate really reflects what we are seeing in the marketplace, which is sluggish at this time and reflects -- we hypothesize, you never know for sure that some farmers are hanging onto their crops and waiting to get past the harvest season when spot prices are usually depressed.

We think it's really going to take the spring planting.

Our estimates for acreage are up 2 million acres next year.

That puts you, instead of 327 million acres in principal crops to 329, but we think it will take that catalyst of spring planting to energize the market, if you will, and that's why we're looking at a 5% increase.

In North America.

And in a similar vain, in order to get your sales up 8%.

I'm sorry.

In order to what?

In order to get your farm equipment sales up 8%, with North America up 5, Europe down 3 in tractors, South America down, are we looking at a substantial continuation in market share gains in Europe, or are you looking for market share gains across the board?

In other words, the 8% doesn't seem to square with up 5, down 3, down 5 to 10.

We have added significant capacity not only in terms of the products in the marketplace but also in terms of our dealers' capacity in Europe, and so we are continuing to expect market share gains in that market, in South America, as well.

We -- you know, have very solid product lines and expect to outperform the market somewhat, although again we remain very cautious in South America.

And in North America I think that, you know, you are not seeing huge assumed market share increases but we have some market share increases in that.

And I should also point out that our 8% sales increase projection would include a little bit of price realization as well.

How much, how much producing below retail does it add?

Or is that 8% a retail forecast?

The 8% would be our own sales.

So how much of that, if any, is producing at retail rather than below?

Well, if you looked, it's probably, round numbers, about $100 million.

So that's a little bit of it as well?

That's absolutely correct.

Thank you.

Thank you.

Your next question comes from David Rossow and please state your company name.

Salomon Smith Barney.

Hi, Marie.

Hi, David.

Just one question on the EPS numbers.

The 28 cents reported today has also been discussed as 32 cents.

Am I correct that 28 cents is consistent with how we've handled the full year so far with the one-time cost like Tennessee and so forth, the shutdown, flowing through the P&L.

Yes, absolutely.

The full year number is like $1.33.

Absolutely.

And that's how we include those restructuring in our core numbers.

We're not -- we provided you with some tables to do some additional analysis, but I mean, even the headlines on our release are done on the basis of including those restructuring charges.

Okay.

And on the question I have on farm equipment, I know you are not right now willing to give us a breakdown by product size.

Were you looking for.

Please give us some color on where do you see the greatest increase in 2003 on profits.

Is it a swing in some of the larger tractors in water loo, is it still international driving the profits?

Just trying to get a feel for where the growth is coming from, what's built into your expectations?

Actually in terms of operating profit, we expect to get, you know, in round numbers, approximately the same out of overseas and out of North American Ag in terms of relative operating performance.

Obviously North American Ag is a little bigger.

And the last question on construction, the profits were pretty strong in this quarter.

I'm just trying to understand the underlying margin assumption on a down slightly production next year.

On a -- that's roughly a flatish kind of volume level.

What are you thinking for margin potential, stripping out Nortrack?

I guess rather than quote a margin potential, I would say that even taking Nortracks out at this point, it would look, you know, plus or minus of a break-even kind of a number.

It's just very difficult to call because our implied Nortracks hit on an operating profit basis for 2003 would be $40 million.

So if Nortrack --

I'm sorry.

I'll get back in queue.

Thank you.

Your next question comes from Alex Blanton and please state your company name.

Ingles and Snyder.

Marie, could you give us the quarterly numbers for the year that don't include the restructuring charges that add up to the $1.51?

How about I perhaps, I can give you the restructuring.

Maybe that will be easier and then I'll let you run that through because I have that handy.

Sure.

In the first quarter of 2002 -- and these numbers are all done on a pretax basis -- in total we would have had about $18 million.

In the second quarter -- wait.

This chart's small.

About $16 million.

Third quarter, $24 million.

And in the fourth quarter, $14 million.

And that should get you approximately $72 million pretax, which, taxes affected at next year's tax rate gives you the $50 million after-tax benefit.

$50 million is the same tax rate in every quarter?

Well, the tax rates are different between the two years.

Because this year's implied tax rate is so much higher, at 57%.

So that the $50 million is calculated using the 2003 tax rate.

Which is 34 -- excuse me, 33 to 34%.

Okay.

Well, I was just trying to get what -- you don't have the per-share impact per quarter?

No, I don't.

Okay.

Secondly, you reduced inventories by about $235 million between the third quarter and the fourth quarter.

Which indicates that you produced less than you sold during the quarter.

Unless that was a raw material reduction, which probably wasn't.

So have you calculated the benefit -- I'm sorry, not the benefit, but the effect, the negative effect on your earnings of that?

In other words, without that inventory reduction, you would have probably reported somewhat more earnings in the fourth quarter simply because you under absorbed over head?

Have you calculated that number?

No, we haven't, Alex, and the reason we haven't is because that's a phenomena that typically occurs in the fourth quarter every year.

So we don't break that out.

We toned focus more on the incremental change from one year to another and so no, I haven't.

The reason I'm asking is, your fourth quarter turned out to be a lot more profitable than it was expected to be, but it looks as if it would have been even better without that inventory reduction.

I can't disagree with you.

On the other hand you would have impacted other quarters.

Yeah.

So at the end of the year it's a wash.

At the end of the year it is, yeah, but quarterly is what we're looking at going forward.

That's describes the -- that describes the profitability at the current time.

Okay.

Thank you.

Fair enough.

Thank you.

Thank you.

Your next question comes from Mark Kosnerick and please state your company name.

Hi, Marie.

It's Mark Kosnerick at Midwest Research.

Hey, Mark.

A few people have been asking about the market share impact next year.

You know, over and above the retail sales expected increase, and I want to just kind of approach that another way to see if maybe this is one way to get some more insight into it.

You have been introducing quite a significant spade of new products this year, and you will also have some pretty significant new models next year.

Can you characterize the -- let's put it this way -- the impact of new models as a percent of your overall mix?

You know, the new models that have come out in the last 12 months?

You know, this year we had the 8000 and 9000 series and, you know, together with other things, that would be perhaps, you know, X%, 30% of your total ag, spectrum of products.

Next year would we have a similar amount of new product exposure, a greater amount, a lesser amount?

That's a good question.

I don't have anything that would be that specific.

I can tell you that the significant product introductions were really last year for the 2002 model year.

This year Europe has some new products but not to the same extent that they had the year before.

In the United States we've got some -- probably the most significant thing in terms of what you tend to look at would be the small end of the 7000 series tractor line.

Now, it's true that you get some benefit from that, but I have to say we also expect to get a benefit in North America from having a full year availability of the new products.

This would be true in Europe as well.

If you'll recall last year, we actually started production of the 8000s and 9000s early in our fiscal quarter, first quarter.

We actually started in late November, and didn't, you know, really reach any kind of critical mass in the marketplace until the spring, and that's normally how you rampup, but that meant we were very tight on availability and so we expect we will be benefiting some this year from better availability.

Plus, it's a fair question.

I hope that helps some.

Well, then could you kind of summarize that we would have kind of an equivalent expected impact of new models in 2003 versus 2002 or less expected or even more expected?

I'm sorry, Mark.

It's very hard for me to pin it down.

I do not have that kind of analysis handy.

I'm sorry.

I would say just in terms of the sheer number, you certainly don't have the number this year from last.

On the other hand you benefit from a full year availability of that, of those new models, in the United States and Canada.

Okay.

So part is the first-year impact of 2003 new models and then we get sort of a secondary, a second wave of benefits for the, kind of the tight market conditions in 2002.

Absolutely.

Okay.

Got it.

Thanks very much.

Thank you.

Thank you.

Your next question comes from Joanna Shatney and please state your company name.

Good morning.

Goldman Sachs.

Good morning, Joanna.

You got to talk about it being shut down 19 production days in the fourth quarter in ag.

Can you just tell us where that ended up being in the fourth quarter?

Yes.

I had that open, in fact.

In the fourth quarter we were down 19% as projected.

Okay.

Can you also talk about your fourth quarter outlook, you know, how you, I guess the sales forecast is going to be up 20 to 25%.

Is that just going to be the normal seasonality in farm equipment that we're building in anticipation of the spring?

Is that the majority of the year-to-year change.

Well, you know, last year because of the significant product start-ups that we had, we really had lower -- that really impacted our shipping ability.

In the first quarter.

That would have hit both Europe and the United States.

So I would expect to see some benefits of there as well, in those markets from being able just to produce, if you will, to a normal production level instead of start-up.

And the same really would be true in the commercial and consumer equipment division where, remember, they had huge product launches as well.

Okay.

And can you just talk directionally about SG&A and R&D?

SA&G in particular is going to be affected some by the fact that we have much more benefits expenses next year.

Principally they would -- higher benefits.

Principally this would be the [OPEB] and costs I just talked about.

They would be up modestly.

So it would be in that 5 to 10% range for both R&D and SA&G.

And it reflects good expense control, but it's being partially offset, if you will, by the fact that those pension and [OPEB] costs are quite higher.

Thanks.

Thank you.

Your next question comes from Robert McCarty and please state your name.

Robert Baird.

Good morning, Marie.

Following up on Jo Ann a's question about first quarter, could you just talk about what kind of assumptions would support an expectation for sales to be up, say, at the low end of your range, 20%; and earnings to be 0?

Well, I think the fact that our first quarter last year wasn't very good.

You are still -- we are -- although we are producing at a higher level, you are still in a seasonally weak quarter.

Another fact that would be helpful maybe in helping you understand the numbers, that the shutdowns in the first quarter for North American Ag are anticipated to be higher this year than a year ago last year.

In the first quarter we were shut down 11 available days.

This year it will be 17%.

Now, you may ask why the first quarter would see an increase in shutdowns.

Okay.

Why?

Oh, thank you for asking. [ LAUGHTER ] The reason is, this really reflects our shift to builds order and we are doing some additional seasonal shutdowns, but again, that seasonal shutdown reflects build-to-order, not market weakness.

Okay.

For my somewhat related or kind of related follow-up.

All right.

If you apply the 15% sales forecast, increase forecast for CCNE to this year's numbers, you have about a $400 million revenues increase, of which you've accounted for 100 with simply bringing production up to retail.

Can you characterize how much of the balance reflects your expectation for the new 100 series product?

You know, it would be fair to say that some of that increase would relate to that, but we have not disclosed our anticipated volumes on that product, and that has to do with the fact that our selling it through a third party, you know, and we are not commenting per se on the projections.

But you are right.

That would have, that would have an impact, but also so does the fact that we would have a full year of availability of some of the models.

Some of the models didn't really even get launched by plan until mid year last year.

Fiscal?

Okay.

Thank you.

Thank you.

Your next question comes from Joel Tise and please state your question name.

Hi, Marie.

Lehman Brothers.

On CCNE I'm wondering if you could give us just a little bit of a sense, even if you did percentages, of how much the improvement comes from better penetration into the channels versus new products, versus the retail demand.

You know, I think I said what I can say, which is again that of the $400 million increase, we know that $100 million comes from producing to retail.

We know that we have an economy that grows about 3%.

So you get some benefits from industry sales.

We know that in our own case, we were tight on product availability as you transition to new products and so there's some of that, as well as obviously the benefits of the new channel, and we hope some market share improvements.

But I'm sorry I don't have any more specific guidance.

Okay.

And then can you talk about what you guys are thinking about, your cash pile that's getting bigger and bigger?

Any plans for that?

Well, I think right now we feel pretty comfortable with that cash pile, given the fact that we are an A2P2 and given the potential for increased uncertainty in the markets in the event of, you know, you could cite any number of things that you could be concerned about, including potential action in Iraq.

So as an A2P2 issuer, we feel pretty good about having that cash cushion and we will, of course, continue to reassess that as we move forward, but I would not see it disappearing at the current time.

Okay.

Thank you.

Thank you.

Your next question comes from Ann Dugma and please state your company name.

Hi, Sanford Bernstein.

Hi, Marie.

Hi, Ann.

My question is around agriculture in Europe.

We had heard from some of our sources last week over there that there is a backlog of some equipment, particularly in the U.K. and France, of up to six months.

How much of that is driving your demand in Europe for next year as opposed to just market growth or share growth?

Backlog?

You mean --

Orders?

Orders?

You know, Ann, that's an interesting question and obviously when people say that, it's something that I don't have an answer.

In our review that did not come up as a significant factor.

I know that the backlogs are better than they were a year ago, and that has certainly had an influence as we take a look at our schedules, but I don't have a specific number.

And my follow-up question is around your adoption of FAS 142.

Have you included in your earnings number for next year any impairment charges or any possibility of impairment charges?

That's a very fair question.

No, I have not.

Our current guidance of $500 to $600 million does not include any potential for impairment charges.

As you know, there is six months from the time you adopt, which for us would be 1 November, to make a decision on impairment.

At this time we don't anticipate there would be a need for charge, but I certainly cannot guarantee that as we complete our review, we may not have to make a different decision.

But at this point the estimate does not contemplate that.

That's a fair, very fair question.

Okay.

Thanks.

Thank you.

Your next question comes from Barry Bannister and please state your company name.

Hi, Marie, Barry Bannister, Legg Mason.

Hi, Barry.

Looking at the $250 to $300 million negative pension expense year over year plus [OPEB] on the P&L, you lowered your rate of return -- excuse me, yes, lowered both your rate of return and your discount rate.

What would that number have been had you not lowered your discount rate 50 basis points I guess to your advantage.

The discount rate on both pensions and [OPEBs] is about 10 to 15% of the total change, incremental change year over year.

So the bulk of the change, the vast majority comes from the -- in [OPEB] it's the medical inflation and the trends there and then the earnings estimates.

In the pension.

So only about, of the change, only about 10 to 15% comes from the discount rate.

It would have been 10 to 15% higher then?

It would have been lower.

Lowering the discount rate raises your expense.

Right, I'm sorry.

I missed that.

Would you go back and tie it all together as far as your 2003?

It looks like it's about 70, 72 cents of negative from pension [OPEB].

That's correct.

But would you tie that together as far as guidance on the EPS.

I'm sorry.

Are you asking for the full?

I mean, we have a number of $500 to $600 million in total.

We said that that does include the $250 to $300 million [OPEB] and pension incremental expense and Barry, I'm not understanding what you are asking.

No, you tied it together.

That's what I was asking.

Thanks.

Okay.

Thank you.

Thank you.

Your next question comes from David Bleustein and please state your company name.

David Bleustein, UBS Warburg.

Marie, congrats on the quarter.

Thank you, David.

Following up on John Mcginty's question, how much did each division underproduce retail in 2002?

I can tell you that it would not -- there really would be no impact in construction in forestry, first.

In commercial and consumer, they are down, as we said, about $215 million.

I'd say round numbers you can figure it's about half of that.

And for ag, I don't -- I'm trying to think if I've seen anything that would really give me more specific guidance to tell you.

The forecast called for it to be about half inventories and about half in field inventories.

So again there you'd be looking at $75 million, $80 million.

And my -- thanks.

My related follow-up is, what factors impact the $40 million of estimated Nortracks expenditures in fiscal 2003?

It's -- what the charge relates to is what our estimated charges will be to a call or a put date, and the single biggest thing that could change that, barring the change in our base assumptions, would be a change in the rate of income for Nortracks.

As you know, although they have been profitable now in the last, each of the last nine quarters, which is the most recent information we have -- excuse me, nine months, not quarters.

Months.

Because of the way the market conditions have been, they have not been able to achieve the level of profitability that we had anticipated.

Again, they are performing very well given the current market conditions.

It's just that the market has been poor.

And so if the market would improve, you would see a reduction, and if the market would deteriorate further, obviously it would increase.

Okay.

Terrific.

Thank you.

Thank you.

Your next question comes from Michael Harris and please state your company name.

Yes.

Deutsche bank.

Good morning, Marie.

Good morning, Michael.

Quick question for you.

Took me a while to get in here.

So most of mine have been addressed, but looking at your dealership in North America, anything going on there?

I notice where at least one of them have elected to focus more on trucks versus ag equipment.

Is that a run-all for --

You are catching me off guard here.

Rush enterprises, I think they are in Texas and Michigan, I believe.

Yes.

They have elected to get out of the ag business and do nothing but trucks.

I mean, is that just a one-all for --

No, it's construction.

Okay.

And they are only exiting out of Michigan, out of Michigan.

They are not exiting the business in other markets that they are in.

It's just in the one geographic location.

Okay.

All right.

That's what I had.

Okay.

Thanks a lot.

Thank you.

Your next question comes from Andrew Casey and please state your company name.

Good morning.

Prudential.

Good morning, Andy.

How are you doing, Marie?

Pretty good.

Good.

A couple of questions.

First, kind of a detailed one on construction and forestry.

Can you give us a sense of what type of swing, if any of swing you are expecting in skid steers in terms of profitability.

The cost of exiting Knoxville would be in the range of $30 million, and so you have the absence of that up-front hit.

I know that they have an improvement in their operating performance on Skid Steers but I would prefer not to give you a hard number at this time.

That's fine.

And then in terms of Nortracks, can you kind of remind us again, when does that go away in the model?

Is that 2004?

Yes.

That would -- that would be an 2004 item.

Okay.

Thanks a lot.

Thank you.

Your next question comes from John Mcginty and please state your company name.

First Boston, still.

Marie, if we take construction equipment at a $75 million loss, I think you said.

That's right, operating loss.

Right.

And Nortracks was $60 million of that.

Right.

And so that would be down to a $15 million loss, and in essence Knoxville, the nonrecurring part of Knoxville was $30.

So if we add that back, they should actually be at a $15 million profit?

Yes.

You are talking about next year, them breaking even ex-Nortracks.

Plus or minus.

Plus or minus.

Yeah.

The point is that's actually a pretty significant disappointment.

You know, the sales are down 2%, which is kind of flat.

They are producing at retail.

That does not speak to somebody that's doing a lot of significant cost-cutting, restructuring.

What's going on?

Well, I think the market, we expect that the market will continue to be very weak and very competitive.

They have made -- they have had huge incremental gains this year versus last year in terms of cost-cutting.

So I don't think they have the opportunities ahead of them that happen some of the other divisions might have.

They have really made great progress.

And could you just explain what you said that I wasn't quite sure I understood, that discounting was higher, that was one of the things you talked, I mean that's in the press release about price realization hurting them in the quarter, but you talked about incentives.

Discounts were higher in the quarter, but if you -- which is a statement of fact -- but if you include list price increases, in other words net price realization, was absolutely slightly positive.

So the total price realization, the achieved list minus the discount was still positive in the quarter?

It was still positive.

It's very slight and I wouldn't under any normal circumstances mention it except for the fact --

It's a big trend reversal.

Well, and it's one quarter.

But this is the first time we've had something positive to talk about in price realization.

Thank you very much.

We've got time for one more question.

Thank you.

Your final question comes from David Rossow and please state your company name.

Salomon Smith Barney.

In the lawn care business, regarding next year's growth, can you give us a little color between commercial and the consumer side with Home Depot?

I get the impression it should be more on the commercial side than consumer if you pulled out Home Depot.

I'm trying to back into how much Home Depot, how much commercial.

Again we're not going to be able to provide precise guidance, but you are correct that without Home Depot, commercial would be where the majority of the improvement is expected.

That is absolutely true.

And the profitability, I know the big riding mowers are very profitable on the consumer side, but when you blend all of consumer, blend in Home Depot, the mix that will provide, can you give us some color, commercial versus consumer thoughts for next year?

Well, I guess we would expect some -- maybe the best way to leave it would be that we would expect some positive incremental improvements in terms of their operating margins.

Well, besides volume now, I'm trying to get a feel for mix.

I'm talking about, that would include some positives.

From there.

All right?

Thank you.

Thank you very much for participating in the call.

Thank you.

This does conclude the Deere and Company conference call.

We thank you for your participation.